Peter Laca (Bloomberg, 20.3.2012)
The Czech central bank should keep monetary conditions relaxed as the euro area’s sovereign debt crisis prompts the government, companies and households to spend less and save more, Vice Governor Mojmir Hampl said.
Policy makers in Prague have refrained from changing monetary settings since May 2010, keeping the benchmark two-week repurchase rate at a record-low 0.75 percent, a quarter-point less than the European Central Bank’s main rate. The economy, which exports about 80 percent of its output, slid into a recession last year as government spending cuts overshadowed demand for Czech-made vehicles, car parts and electronics goods.
The central bank doesn’t need to raise interest rates even as inflation accelerated to the fastest pace in more than three years in February because the spike was driven by an increase in the value-added tax rate at the start of the year, Hampl said. Austerity measures and a lack of spending by households and companies keeps demand-led inflation pressures under control.
“All major economic subjects in the Czech economy are in a cautious mode,” Hampl said in an interview yesterday in his office in the center of Prague. “A combination of an economy without an internal driver, conservative domestic subjects and an external environment lacking a real recovery, makes me lean toward relaxed monetary conditions.”
Hampl declined to say how he will vote on rates at the next monetary-policy session on March 29, nor would he say whether economic developments may warrant a decline in interest rates in the second half of the year as indicated in the central bank’s forecast from Feb. 2.
Czech Recession
The Czech economy ships about 70 percent of its exports to the euro area’s 17 members. Gross domestic product fell 0.1 percent in the final quarter of 2011, the same as in the previous three months. GDP in Germany, Europe’s largest economy and the main destination for Czech goods, contracted 0.2 percent in the fourth quarter after growing 0.6 percent between July and September.
“We aren’t exactly experiencing golden times in our economy,” Hampl said. “It lacks its own impetus, its own driver. The economy is dependent on the EU and the euro zone, which have not yet solved their problems.”
The Czech inflation rate jumped to 3.7 percent in February, the highest since November 2008, exceeding the central bank’s 2 percent target for a fifth month. The central bank forecasts the headline rate will stay above 3 percent this year and sees it falling to 1.5 percent in the first quarter in 2013.
Policy Inflation
Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, will “move near” the inflation target of 2 percent by the third quarter of next year, the bank said in a Feb. 2 forecast.
“Current inflation numbers are higher than our expectations,” Hampl said. “But these one-off factors, caused mainly by the increase in indirect taxes, aren’t changing the fact that this is a low-inflation economy.”
The government raised the lower bracket for the value-added tax levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 2012 to boost budget revenue. Retail sales growth slowed to 1.3 percent in January, from 7.3 percent a year earlier, as budget spending cuts curbed household income and unemployment rate rose to an 11-month high of 9.2 percent.
Government spending fell 1.1 percent in the fourth quarter from the previous three months, while household consumption was flat.
Inflation is tamed by strengthening of the Czech koruna, which has gained 6.4 percent so far this year, the seventh- biggest rise among 25 emerging-market currencies tracked by Bloomberg. The koruna traded at 24.476 as of 10:43 a.m. in Prague today, little changed from yesterday’s close.
More Regulation May Hurt EU’s Growth, Czech Policy Maker Says
Proposals to tighten financial- industry regulation and introduce a special transaction tax threaten to curtail the European Union’s economic growth, Czech central bank Vice-Governor Mojmir Hampl said. Hampl commented on the euro area’s sovereign-debt crisis, its impact on the Czech economy and the country’s monetary settings in an interview in Prague yesterday.
On the sovereign-debt crisis:
“Looking at things from outside the euro zone, it seems we haven’t seen the definite solution of problems with overly indebted countries yet.
‘‘Regarding Greece, even with the haircut taken by private creditors, the amount of remaining debt will be large and I would personally say unsustainable.
‘‘If you have an insolvent country, it takes a radical cut in debt to solve your problems. The level of debt at 120 percent of GDP or more, after the private-sector haircut, would be difficult to manage even for countries with faster growth and better growth and macroeconomic prospects.
‘‘Private creditors were replaced by public creditors, and the big question now is what will happen to the debt held by these public creditors. If they have to take losses on this debt, that would be something potentially influencing us as well through IMF involvement.
‘‘The question is whether the magnitude of structural changes needed in EU economies isn’t larger than what is acceptable for the public. My intuition is telling me that the size of the required changes is greater than the tolerance level of voters in some EU countries.
‘‘We in the EU aren’t helping to improve economic growth potential with a number of proposals of new regulations or interventions in the economy. Namely in the area of regulation of the financial sector we are doing rather too much, too soon.
‘‘It’s hard to understand a proposal to introduce a financial-transaction tax at a time when the economic outlook is so discouraging. The EU is trying to tighten rules at a time when the economy is near the bottom, which is curtailing growth prospects for the future.’’
On the domestic economy:
‘‘We aren’t exactly experiencing golden times in our economy. It lacks its own impetus, its own driver. The economy is dependent on the EU and the euro zone, which have not yet solved their problems.
‘‘All major economic subjects in the Czech economy are in a cautious mode. Companies, households and the government are all very conservative. In bad times, they tend to invest or spend less and save more.
‘‘This means that the economy depends on impulses from abroad. The Czech economy isn’t a pro-inflationary environment and it doesn’t warrant monetary tightening.’’
On higher inflation:
‘‘Current inflation numbers are higher than our expectations. But these one-off factors, caused mainly by the increase in indirect taxes, aren’t changing the fact that this is a low-inflation economy.
‘‘In the Czech Republic, an increase in indirect taxes is paradoxically an anti-inflationary factor. Such an increase pushes the headline inflation rate up, but it depresses demand as people spend less and start saving even more.
‘‘A combination of an economy without an internal driver, conservative domestic subjects and an external environment lacking a real recovery, makes me lean toward relaxed monetary conditions.
‘‘The end of the year is very far away and one can hardly rule out anything in the current uncertain situation. But looking at the big European picture now, the Czech economy as part of it is an anti-inflationary story.’’
On fiscal consolidation:
‘‘A fiscal consolidation effort is absolutely fundamental for the stability of financial institutions in the Czech Republic, and the importance of this will only grow in time.
‘‘A failure to consolidate public finances in the future would be a risk to financial institutions, whose share of holding the state debt is increasing.’’